Photo by Harli Marten on Unsplash
IRAs allow investors to save for retirement, receive a current year tax deduction and defer taxes on their investment until money comes out of the account. It’s a great way to save for the future, however, all that tax savings comes with a tradeoff – eventually you have to start taking distributions from your retirement accounts.
Even if you don’t need the cash, you must begin taking distributions from your IRA and other retirement plans when you turn 72. Failing to do so comes with an IRS penalty of 50% of your RMD amount!
The CARES Act waived IRA RMDs for 2020, but they are in full effect for the 2021 tax year.
Below are a few RMD basics for traditional IRAs:
- Your first RMD must be taken by April 1 of the year after the year you turn 72. If you turned 72 in 2021, you may delay your first RMD until April 1 of next year. If you do that, you will have two RMDs to complete in 2022 – the 2021 RMD which was delayed until April 1, 2022 and your actual 2022 RMD which must be taken before the end of the year.
- Your IRA RMD amount is based on the value of your accounts as of the previous year and an IRS determined divisor based on your age. The divisor for a person who turned 72 this year is 25.6. So… if your 12-31-2020 IRA balance was $1,000,000, and you turned 72 this year, your IRA RMD would be $1,000,000/25.6 or $39,062.50.
- Your IRA RMD gets recalculated every year. In the example above, next year (2022) you will have a new IRA RMD amount based on the value of your IRA(s) at the end of this year and a divisor for a 73-year-old, 24.7 in this case.
- The IRS allows you to aggregate all your IRA balances when calculating your RMD, and take your RMD from one or a combination of your IRA accounts. Have three IRAs? Your RMD is based on the collective balance of all three, but you can take the distribution from any one (or more), if you like.
- 401(k) plans and other retirement accounts DO NOT count towards your IRA RMD calculation. The RMD for those accounts must be calculated and taken separately
- Qualified Charitable Distributions (QCDs) may count towards your IRA RMD. Note the word “Qualified”. To complete a Qualified Charitable Distribution, you must send the money directly from your IRA to a qualified 501(c)3 non-profit. You must also be over 70 ½ and your QCD is limited to a maximum of $100,000. You can get more information on Qualified Charitable Distributions here.
- Missed RMDs are subject to a penalty of 50% of the RMD amount. Using my $1,000,000 IRA example above, missing the RMD could result in a penalty of over $18,000. If you have missed an IRA RMD, the IRS may waive the fee if you make up any outstanding distributions and pay the past due taxes. To fix your missed IRA RMD talk to your tax professional. You will also need form 5329. You can download it here.
- Inherited IRAs have their own, separate IRA RMD rules that changed with the SECURE Act.
- Roth IRAs have no Required Minimum Distribution but Roth 401(k)s do.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.